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Key points
- More than 80 witnesses were examined.
- Urgent action is needed to curtail extensions of HMRC powers that are either unnecessary or being misused.
- Reduced resources affect departmental performance.
- The inability to appeal against accelerated payment and follower notices is an abuse of power.
- More publicity of avoidance schemes.
- Disappointment at the minister’s failure to explain the oversight and management of the department.
In December, the House of Lords economic affairs committee published its report, The Powers of HMRC: Treating Taxpayers Fairly (tinyurl.com/y8qeuuye). Before producing it, their lordships examined more than 80 witnesses, including myself, in person or by a written submission. It captures the essence of the issues under review and produces a sensible call for action.
In short, the report calls for urgent action to curtail what their lordships see as extensions to HMRC powers that are either unnecessary or are being misused. The report is clear that, often, the fault lies not with the Revenue but with pressure generated by reduced resources, policy made without reference to due process, and legislation that has had little parliamentary examination and which, consequently, may have unexpected outcomes.
However, the report is also clear that, in some instances, and in its wish to meet no doubt demanding targets, the department has strayed: ‘HMRC’s declining resources have rendered it unable to effectively perform its dual roles of tackling avoidance and evasion and ensuring taxpayers are treated fairly.’
Their lordships have called for a new powers review – bearing in mind that the last one closed a mere five years ago – to ensure that the department’s funding and resources, its targets and its actions meet a reasonable standard of efficiency, performance and fairness. It was this last issue that caused most concern to the committee following many witnesses producing examples of perceived abuse of their extensive powers by HMRC officials.
I would hope that such a review would be preceded by a stalling of any new powers and, in particular, by a delay in the loan charge. This warranted its own chapter in the report, culminating in a call for its ignoring of taxpayer protections from ‘closed’ years, being restored.
It is worth noting that the inability to appeal against accelerated payment notices (APNs) and follower notices (FNs) was considered an abuse of power along with the hurdles to justice that taxpayers face in trying to bring judicial review cases (which should be placed within the remit of a tribunal). This echoes calls in the past for all taxation matters to be concentrated and most importantly, to be accessible.
The report says:
‘Penalties associated with general anti-abuse rule and follower notices are draconian and restrict access to justice…
‘Taxpayers who challenge HMRC’s view of the law and pursue litigation after a follower notice or general anti-abuse rule ruling should not be penalised if they are ultimately unsuccessful. We recommend that these penalties are abolished…
‘Judicial review proceedings in respect of HMRC decisions may only be brought in the High Court, which makes them prohibitively expensive for most taxpayers. We recommend that the government legislates to give the First-tier Tribunal (Tax) the power to conduct judicial reviews.’
There should be no mistake that a degree of culpability lies with taxpayers who have used an avoidance scheme that has been declared ineffective by an appropriate tribunal or court or who have transgressed clear and unequivocal legislation. In such instances, the application of appropriate powers by HMRC is something to be supported.
However, their lordships have found that HMRC is incapable of distinguishing between degrees of culpability by taxpayers. The assumption is that if HMRC has decided, unilaterally and often without judicial sanction, that avoidance is present, the full force of revenue collection powers is unleashed. And this will be the case even if the legislation and definitions did not exist at the time of the alleged offence. This leads to an abuse of the powers review principles of efficiency, performance and fairness.
On the 2019 loan charge, their lordships said:
‘HMRC has a range of powers at its disposal to deal with promoters of tax avoidance schemes, but we have seen little evidence of action taken against those who promote disguised remuneration schemes. In the absence of publicised actions, HMRC appears to be prioritising recovery of tax revenue over justice by targeting individuals, rather than promoters (who could be considered more culpable), so it can more easily recover liabilities…
‘We encourage HMRC to do more to publicise any actions it is taking against promoters of disguised remuneration schemes. “Spotlight” publications are neither well-known nor well-read, and are therefore insufficient for this purpose…
‘The individuals affected by the loan charge who gave evidence to this inquiry are very different from those generally perceived to be involved in tax avoidance. While they must accept some responsibility, they are not as culpable as those who are much better off, extensively advised and whose involvement in such schemes may be regarded as more egregious. In many circumstances, individuals were being directed to use these schemes by their employer, who would have been in a better position to determine the consequences for the employee of taking a loan. It is unfortunate that the loan charge does not discriminate for different intents and circumstances.’
Increasing demands
It should not be assumed that the fault lies entirely with HMRC. The report is clear that shortcuts have been made in the processes designed to identify issues within the tax system, examine whether a solution is needed and, if so, decide what that should be, and then to consult and legislate. The criticism is that, driven by demands to increase revenue, there is no examination of whether a solution is needed or whether alternatives are available. Instead, the tendency appears to be a rush to new law, new powers, and more work for an already stretched department.
For example, on the proposal to extend the time limit to 12 years for offshore matters – something their lordships found to be ‘unreasonably onerous and disproportionate to the risk’ – they said: ‘It is wrong if, rather than funding HMRC sufficiently to conduct offshore enquiries in a timely manner, the government is placing disproportionate burdens on taxpayers and eroding important taxpayer safeguards.’
Parliament’s part
Moving upstream, parliament comes in for a share of blame. The loan charge was passed into law with the flimsiest of examinations and just three contributions from those elected to represent us. For a law that is, in the opinion of the committee, retrospective and therefore destabilising for the whole tax system, that is shocking. It is to be hoped that, as part of the solution – a new powers review – called for by the report, the loan charge is at least postponed until the review is completed.
Further, there is some sympathy for HMRC in the report. It is acknowledged that the department is under-resourced, but expected to do more with less. And it faces unprecedented challenges in the next few years because of Brexit (or not). Employees face being relocated into regional centres and, almost certainly, this will result in staff leaving. Practitioners speak with HMRC frontline officers every day. We are told that morale is low, workloads high and, in essence, management is done by measuring the number of letters and phone calls that are answered each day.
Ministerial failure
The committee was also disappointed by the failure of the responsible minister to explain how his oversight and management of the department is conducted.
Their lordships explained very carefully that the gravity of the evidence heard and the response required went beyond what they considered even a senior member of HMRC could deliver. Instead they wanted to hear from the minister. That did not happen.
‘The sub-committee invited the Financial Secretary to the Treasury, the Rt Hon Mel Stride MP, to give evidence to the inquiry. The Financial Secretary refused to participate. We have serious concerns about the minister’s failure to give evidence to our inquiry. He is not only responsible for the legislative framework we consider in this report, but also the departmental minister for HMRC, and therefore accountable to parliament for HMRC’s performance. Given the seriousness of concerns raised, the public has an interest in ministerial accountability to parliament on the powers of HMRC.’
A further invitation has been extended and the committee hoped that appropriate accountability and responsibility will be grasped.
Overall, therefore, although HMRC has been found to have overstepped the mark in many instances, there are excuses. Or there were until we saw the department’s immediate reaction to the many flaws found by their lordships.
‘Parliament has given HMRC powers ... and it uses them responsibly and subject to appropriate checks and balances.’
I do wonder whether the HMRC press office had actually read the report before the department’s response was produced. Perhaps not.
Parliament is the ultimate power when it comes to how one of its civil service agencies should operate. It can assign far-reaching and draconian powers to the department or can choose to limit the extent of its authority. Further, those powers can be examined and varied. In this instance, the Lords said clearly that the pendulum has swung too far and needs to be re-centred. To me, for HMRC to respond to such a call by, in essence, suggesting that the committee is wrong and that it uses its powers ‘responsibly’, is hard to unbelieve. Does HMRC consider itself above parliamentary scrutiny?
The government response
The government has responded to the highly critical report (tinyurl.com/y7jd6ew6) and the recommendations that might have alleviated some of the injustices highlighted have been rejected. There continues to be a refusal to acknowledge that the whole history of the enquiries into contractors was founded on poor policy and administration.
Mr Stride, has often said that the loan charge is not retrospective and is a new charge on a new source. However, a senior HMRC deputy director, Mary Aiston was questioned recently by the House of Commons Treasury Committee (tinyurl.com/y9fglsqe, question 35). She said: ‘The intention of the loan charge is to ensure that these people who have gotten into disguised remuneration avoidance pay their fair share.’
One might see this as being somewhat ‘off message’ and exposing the loan charge for what it is.
Further, one of the key charges laid against HMRC and its overseers, is that the general public – and in this case the quite narrow and easily identifiable target audience for these ‘disguised remuneration’ schemes – was completely unaware that the department regarded them as tax avoidance schemes. It was not until 2010 that legislation appeared. Despite claims to the contrary, we have seen no tax case that is directly applicable. It now appears that there is to be a continuation of HMRC being unable to express its view to taxpayers and perhaps a difference of opinion (or a poor briefing) between the agency and those charged with its oversight.
The long list of sensible and pragmatic suggestions from their lordships has been kicked into the long grass. Does that matter? Yes, it very much does.
In the debate on the third reading of the Finance (No 3) Bill, several MPs mentioned that they had been contacted by constituents who were facing substantial loan charge liabilities. I am sure that many Taxation readers will have clients in a similar situation, suffering stress and ill health as a result.
Several weeks ago, I was contacted by a taxpayer who concedes he made an error in entering a loan scheme and ceased using it as soon as he discovered HMRC’s views – a discovery made entirely by chance. He has tried, twice formally and more often through agents, to settle what he thinks is a fair amount. Every approach has been rejected and he is suffering severe depression as a result. It seems that his tax situation and what many see as the pursuit of unfair amounts, supported by the Treasury who appear to see no fault in this campaign, has been directly responsible for this state of affairs.
How many more such cases must arise before senior HMRC officers and their overseers, ask themselves whether the present course of action is worth the human cost?
